- Consultation auprès des Canadiens et des Canadiennes -

Présentation de la « Credit Union Central of Canada » en réponse à la consultation sur les fusions de grandes banques du ministère des Finances Canada : 

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January 20, 2004

Mr. Gerry Salembier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
140 O'Connor Street
Ottawa, Ontario
K1A 0G5

Dear Mr. Salembier:

I am writing on behalf of Credit Union Central of Canada (Canadian Central) to provide the Department of Finance with our views on a number of issues raised in the Department's June 2003 response to the recommendations of the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce relating to the public interest implications of large bank mergers in Canada.

As you may know, Canadian Central is the national trade association and central finance facility for Canada's nine provincial central credit union organizations and their 607 member credit unions. These credit unions have approximately 1803 locations, 4.6 million members and over $70.5 billion in assets. Our network of credit unions employs over 21,000 Canadians.

Before proceeding, Canadian Central would like to express our appreciation for the efforts of the Parliamentary Committees and the Department of Finance in bringing greater clarity to the public interest considerations that will be factors in the Federal Government's review of proposed mergers between large banks. The clarity gained from this work lends greater transparency and legitimacy to the merger review process and may help ensure a more predictable evolution for the Canadian financial services sector in the coming years.

The Federal Government Response to the house of Commons and Senate Committee Reports on the Public Interest Implications of large Bank Mergers

We note that the Department's June 2003 response seeks input from stakeholders and the general public on a significant number of new issues that had not been formally considered by the Parliamentary Committees. For the purposes of this letter we have categorized these issues into two broad themes:

1. How should consolidation in the Canadian financial services sector be allowed to proceed?

2. What initiatives should the government take to foster greater competition in the marketplace and, most importantly for our system, what further public policy steps can be taken to enhance the ability of credit unions to contribute to making the financial services sector in Canada more competitive?

These themes will be discussed in turn.

Federal Government Policy and Financial Market Consolidation

The Minister's response asks whether Federal Government policy should be adjusted so that large demutualized insurance companies can merge with each other (and/or large banks) and whether the government should set out a desired structure for Canadian financial markets - including specifying a minimum acceptable number of large institutions.

We are of the view that these issues cannot be properly evaluated without considering the evolving balance of competition within the Canadian financial services sector. There is no doubt that any mergers between the large banks, large insurance companies, or large banks and large insurance companies, would dramatically change the landscape of Canada's financial market. We do not underestimate the economies of scale and scope that such merged entities would derive from such a consolidation and they would be very difficult to match. For this reason we continue to believe that, if the Federal Government allows such mergers to take place, greater attention must be paid to fostering competitive balance in the financial services sector and on developing a stronger second tier of financial institutions capable of contesting the increased market power of the merged banks and/or insurance companies. This is necessary to ensure that consumers continue to have real choices in the market for retail financial services.

We believe that the most promising means of ensuring this competitive balance is for the Federal Government to further its engagement with the cooperative financial sector and to seek to strengthen its ability to compete against the large financial institutions.

In the past, the Federal Government has made a number of attempts to increase the competition in the banking sector. Very recently, Bill C-8 made it easier to incorporate new banks and this effort represented a genuine attempt by the Federal Government to inject more competition into the banking sector. Previous Bank Act revisions also featured initiatives aimed at creating more banking institutions to serve the needs of Canadian consumers. Despite these initiatives the banking sector has not become the source of a flourishing second tier of retail competition for the large banks. The domestic stand-alone banks established in recent years have not made a significant impact on the retail market and a number of the other domestic banks are operating subsidiaries of existing non-bank financial institutions, including a few credit unions. This underlines the fact that the important second tier of financial institutions does not find its source in the banking sector. There are few indications this will change in the future.

Similarly, the foreign bank subsidiaries incorporated since 1980 under the Bank Act also did not bring significant new competition for the large Canadian banks. The competition that these institutions did bring was limited in scale and targeted to very narrow markets. Given this experience, a further liberalization of foreign bank entry rules will likely have very limited impact on the retail financial services market place. Most new foreign entrants will focus their business activities on the heavily banked urban areas and target the well served affluent market.

Federal Government Policies to Foster Competition

As indicated above, we believe that the Federal Government must pay greater attention to fostering competitive balance in the financial services sector and focus on developing a stronger second tier of financial institutions to compete with the large banks and insurance companies. This is necessary to ensure that consumers continue to have real choices and service in the market for retail financial services. Only the cooperative financial services sector has the real potential to serve as the crucial second tier of financial institutions envisaged in government policy. In terms of membership, retail presence, asset size, and range of products and services, there are currently no other financial institutions in Canada with the capacity to offer a significant alternative to the large banks or to a mega-bank resulting from a merger.

There are several actions the Federal Government can take to enhance the ability of the credit union system to provide that vital second tier competition and the consumer choice and service Canadian's have long desired:

1. Commit to an increased engagement with the credit union system during the consultation process leading up to the 2006 review of federal financial services legislation and seek to build upon recent efforts to strengthen our capacity to compete.

For our part, Canadian Central is taking steps to address this question in the context of the 2006 legislative review. We have begun a process of extensive consultations within the credit union system through which we will identify concrete public policy initiatives that will enhance our ability to compete and provide expanded services to Canadians who are members of the credit union system. As the views of our membership develop, Canadian Central will communicate our policy positions with the Federal Government. Our recommendations will be detailed and realistic in helping the Department of Finance enhance the competitiveness of the credit union system and , in turn, further strengthen the financial services sector overall.

As we move forward, however, the Federal Government must recognize that the strength of the credit union system lies in its diversity and therefore must not lose sight of this diversity in legislative proposals.

2. Consider adjusting the tax treatment of credit union owned banks or banks that are formed by the continuation of a credit union. The current tax treatment of such entities is a significant impediment to credit unions entering the banking sector in an effective way since, without the credit union tax rate, (if even for an interim period) there is a very weak financial case for using the bank model.  

3. Consult with the credit union system and other financial institutions on the manner in which divestitures should be managed in the event of a merger between large Canadian banks. Over the past few years, credit unions have purchased over 70 bank branches and this experience has made it clear that a properly managed divestiture of bank branches could have very positive competitive impacts. Since 2000, credit unions have purchased 73 bank branches: 14 in British Columbia, 22 in Alberta, 17 in Saskatchewan, 16 in Manitoba, 2 in New Brunswick, and 2 in Nova Scotia. These purchases have ensured that services have been retained in many Canadian communities, while the overall growth, efficiency and profitability of the credit unions have been enhanced.

4. The Department of Finance response noted that during the Committee hearings, ATM full functionality was suggested as a means of overcoming barriers to competition in banking in Canada. We believe that this may be a worthwhile avenue to explore and recommend that the Department consider undertaking a proper consultation with financial institutions on how full functionality could be implemented to enhance competition while ensuring the safety, soundness and efficiency of the payments system.

In closing, Canadian Central would like to thank you for the opportunity to provide comments on the Department of Finance's consultation paper. Should you have any questions regarding any matter raised in this letter, please do not hesitate to contact me or Mr. Hugh Scott, Director, Government Relations in our Ottawa office at (613) 238-6747 (ext. 218).

Sincerely,

Joanne DeLaurentiis
President and Chief Executive Officer